Abstract : Contractors represent a sizable, and potentially growing, portion of the Air Force's repair system. How should the Air Force design its repair contracts? In this report, we develop an economic model of contractor motivations and behavior and simulate how contractors would respond to different types of contracts. We derive the government's optimal contract under varying scenarios. This model of contractor behavior is useful as a way to quickly and inexpensively test different types of contracts. Further, models are a well-developed and accepted part of economic theory, and that research is utilized here in the construction and interpretation of the model. We model an aircraft system that experiences stochastic failures. Broken parts enter the repair system irregularly. The contractor must repair the broken parts and/or replace them with spare parts to maintain a specified aircraft availability level. The contractor has a variety of choice variables, e.g., repair capacity and quality. We assume the contractor makes these choices based on what course of action will prove best for the contractor, given the contract provided by the government. Meanwhile, the government chooses the contract form, which may include stipulations regarding a fee per unit repaired, a fee per spare required, and/or a lump-sum fee that does not vary with the number of units repaired or spares needed. The government knows the contractor will maximize for its own benefit in response to the contract provided In the model, the government must provide the contractor with a combination of fees and a lump sum that is lucrative enough ex ante (ahead of time) to induce the contractor to participate in the contract.